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3 Things You Need to Watch at Johnson & Johnson

By Dan Carroll - Apr 17, 2013 at 1:39PM

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With J&J's earnings out, what do you need to keep an eye on for the future?

Earnings season's in full throttle now, and Johnson & Johnson (JNJ 1.22%) stepped up and released its quarterly data Tuesday. The company's results were good enough to please investors -- shares jumped more than 2% on the day after J&J's profit (excluding items) topped analyst projections and jumped year-over-year. That's as good as it gets for shareholders on earnings day.

The data's in the books and in the past now, however, so what does the data say you should be looking forward to for the future of health care's largest player?

A bright future from pharmaceuticals
J&J's pharmaceutical division fueled this most recent quarter's growth, as sales from the unit jumped more than 11% at a common currency. The business has been doing quite well, growing 4% last year after boasting 8.8% sales growth in 2011. More and more, J&J's pharmaceutical branch has become the financial workhorse of the company.

While J&J's standout blockbuster Remicade continues to churn out billions of dollars in annual sales, investors need to expect more from the company's other drugs. So far, so good: Despite patent expirations cutting into sales of therapies such as Levaquin, some of J&J's newer medications are growing at a nice clip. Immunology drug Stelara continues to impress, earning a 57% year-over-year rise in sales in the most recent quarter. The drug hit blockbuster status last year, and the earliest results of 2013 indicate more growth to come.

Expect Stelara to emerge as a staple of J&J's pharmaceutical business this year and as one of the core drugs of its foundation. Watch for steady growth from other promising medications as well: Prostate cancer drug Zytiga has exploded out of the gate since its approval a few years back and nearly hit blockbuster status last year.

Newly approved diabetes drug Invokana is another drug that investors need to keep an eye on. The drug has already been favorably compared to Merck's (MRK 0.42%) diabetes behemoth Januvia -- a drug that, along with similar diabetes treatment Janumet, posted a whopping $5.7 billion in sales in 2012. If Invokana landed even half of that, it'd provide a major boost to J&J's future pharmaceutical sales.

A murky future for medical devices
That business will have to do well, because the company's other divisions aren't growing at anywhere near the same clip.

Medical devices in particular demand investor scrutiny. J&J's medical device business grew in the quarter due to the acquisition of Synthes last year, but the company can't rely on that purchase forever. Synthes' acquisition also contributed to the growth of J&J's orthopedics business in 2012, as sales grew more than 34% in the year. Outside of orthopedics, however, the company's medical device business lagged.

Sales in the division's surgical care, diagnostics, and diabetes care businesses declined last year, while cardiovascular device sales slumped more than 13%. Cardiovascular device sales -- particularly in the cardiac rhythm management, or CRM, industry -- have been on the decline lately industrywide; Medtronic (MDT 1.44%), one of J&J's largest device competitors, has seen its CRM revenue fall 3% over the last nine months, and it's done far better than worse-off rivals in the industry. Don't expect this business to turn around quickly for J&J.

Even growing businesses outside of orthopedics failed to inspire: Vision care and specialty surgery device sales, which together made up nearly 13% of total medical device revenue, gained less than 5% each.

Going forward, don't expect the medical device business to deliver any miracles. Once the Synthes acquisition sinks in, orthopedics sales should return to more modest growth. Investors will have to hope that's enough to keep this division moving in the right direction, because for now J&J's other medical device units aren't keeping up with growth.

Power in the pipeline
It's thus doubly important that J&J's pharmaceutical pipeline delivers blockbusters of the future -- and investors will need to keep an eye on the company's most promising drug candidates. Invokana's approval is the first step toward J&J's brighter pharmaceutical future, but the company will need more than that despite not facing major losses via patent expirations for some time.

Look for two promising therapies to light up Wall Street's eyes. The first, phase 3 candidate simeprevir, is vying to make an impact in the growing hepatitis C market. Although many other hepatitis C therapies exist already or are in development from rival firms, industry analysts still predict the market could reach $25 billion in worldwide sales by 2020. That's more than enough incentive for J&J to surge ahead with simeprevir in the hopes of adding another blockbuster to its arsenal.

The most promising drug in development is sirukumab, however. Keep your eyes on this rheumatoid arthritis drug looking to make its mark in an area that J&J has earned plenty of experience in with Remicade's success. The rheumatoid arthritis market alone is a massive and lucrative opportunity despite the presence of several competing blockbusters, including Remicade. If sirukumab proves a success, this drug could add another blockbuster to J&J's portfolio.

Change awaits as J&J evolves
Investors walked away from Johnson & Johnson's earnings satisfied on Tuesday, but now's not the time to take your eyes off this company. While J&J's still at the pinnacle of the health care industry, developments such as the Synthes purchase and its growing pharmaceutical pipeline are keeping shareholders on their toes. Keep watching this company's future: J&J can't afford to slow down now.

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Johnson & Johnson Stock Quote
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Merck & Co., Inc.
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Medtronic plc
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